When did you last raise your prices? If the real answer involves the phrase "before the pandemic," you're in large company.
Most owners don't avoid price increases because they've run the numbers and decided against it. They avoid them because it feels awkward, and because there's a little voice saying every customer will leave the minute the invoice changes. That voice is loud, and it's usually bad at math.
This piece covers how to price for profit using numbers from your own books: what your work really costs, what margin you need, and how to test a price increase on paper before you test it on customers.
Start with what the work actually costs
Pricing goes sideways when the cost number is a guess. Before you touch a price, know the direct cost of delivering one unit, one job or one month of service.
Direct costs are the ones that rise and fall with each sale: materials, subcontractors, payment processing fees, and the wages of the people doing the work. For service businesses, labor is the big one, and it's often underpriced because owners count hours billed instead of hours worked. (The two-hour job that took four hours with drive time and a callback is a four-hour job.)
If your books lump direct labor into general payroll, your gross margin will look different from reality. Our explainer on gross margin vs net margin walks through which costs belong where, and why it changes the answer.
Margin and markup are different numbers
This one causes more underpricing than almost anything else.
Markup is profit as a percentage of cost. Margin is profit as a percentage of price. Say a job costs you $70 to deliver and you sell it for $100. Your margin is 30% ($30 of the $100 price). Your markup is about 43% ($30 on top of $70).
Now say you aim for a "30% margin" but calculate it as a 30% markup. You'd charge $91, and your real margin would be about 23%. Seven points gone, without anyone noticing, on every job.
When you set a pricing strategy, margin is the number to target, because your overhead and profit come out of the selling price, not the cost.
How to price for profit: a worked example
Let's say you run a landscaping company. Last year's books show:
- Revenue: $800,000
- Direct costs (crew wages, materials, equipment fuel, dump fees): $560,000
- Gross profit: $240,000, a 30% gross margin
- Overhead: $190,000
- Profit before taxes: $50,000
You're considering a 5% price increase. At the same volume, revenue becomes $840,000. Direct costs don't change, so gross profit jumps to $280,000. That's $40,000 more, almost doubling your profit, from one change.
Now the panic question: what if customers leave? Here's the test. After the increase, every $1.00 of old-price work becomes $1.05 of revenue against $0.70 of cost, so you keep $0.35 instead of $0.30. To match last year's $240,000 of gross profit, you need $240,000 divided by $0.35, or about $685,700 of old-price volume.
That means you could lose roughly 14% of your volume and still earn the same gross profit (while doing less work). Most businesses that raise prices 5% don't lose anything close to 14% of their customers.
The shortcut formula, if you like those: volume you can lose equals the price increase divided by (gross margin plus the price increase). Here, 5 divided by 35.
How to raise prices without the panic
Once the math says yes, the rollout is mostly about being clear and calm.
- Pick the customers or services where your margin is thinnest. Those need the increase most.
- Decide on the new price and the effective date, at least 30 days out.
- Tell customers plainly, with a short reason if there is one (labor, materials, insurance). Skip the long apology.
- Update quotes, price lists and recurring invoices in your accounting system on the same date.
- Watch gross margin and customer count for the next two or three months.
Some service businesses also discover that a few clients are unprofitable at any reasonable price. Measuring profit by client is the way to find them, and our guide on agency accounting and profit by client shows how to set that up.
Pricing against your break-even point
Your price also decides how much you need to sell just to cover overhead. Higher margin, lower break-even point. In the landscaping example, at a 30% margin you need about $633,000 of revenue to cover $190,000 of overhead. At 33%, you need about $576,000. Our walkthrough of break-even analysis for small business has the full calculation.
This is the type of question a fractional CFO helps answer with you: modeling price changes, testing scenarios and picking the numbers to watch afterward. ABFI's fractional CFO advisory services sit on top of reconciled monthly books, which matters, because a pricing model built on miscategorized costs is just a confident guess.
Questions owners ask
How often should a small business raise prices?
Many businesses review prices once a year and adjust when costs move meaningfully. Small, regular increases are usually easier for customers to absorb than one large jump after several years of rising costs.
What is a good profit margin to price for?
It depends on your industry and overhead. Work backward: your gross margin needs to cover overhead and the profit you want, at the volume you can realistically deliver.
Should I price based on competitors?
Competitor prices tell you what the market will tolerate, but they don't tell you your costs. Use them as a check on your number, not as the number itself.
Ready to test a price change with real numbers?
If your prices haven't moved in a while and you'd like to see what a change would do before you send the letter, request a consultation. We'll look at your margins with you and talk through what a CFO-level review would involve. For a planning range on monthly support, the Scope & Investment Estimator on our pricing page is a quick start.